5 Reasons the Music Business Is in the Toilet

It doesn’t take a big-shot music executive or a statistician to see that the music industry is in a major period of upheaval.

Sales of recorded music are at or near all-time lows, digital downloads and concert revenues aren’t doing enough to stop the bleeding, and technology has made recording and sharing music easier than ever, driving up competition in an already traditionally competitive industry.

Liam Boluk is a venture capitalist and strategist with a lot to say about the music industry. In a new report for REDEF, Boluk examines how innovation, technology, and industry practices have collided to throw the entire music business into a state of flux and explores how the industry can relaunch itself into the robust, money-making machine it had been just a few decades ago.

Here is a list of 5 ways the music industry is in serious trouble and some insight into how it can get itself turned around.

1. Music Sales are in the Toilet

Sales of recorded music have declined by 70 percent since 1999, even while adjusting for inflation, according to Boluk. After years of sustained growth, digital music downloads from online outlets like iTunes have also begun to decline.

What’s disheartening is that music is seemingly consumed more today than at any time in history, with people popping in earbuds almost everywhere, from the gym to the subway.

Physical retail sales have perhaps taken the biggest hit; last year, Walmart, which sells the most physical albums in the country by a long shot (one out of every four CDs sold in the U.S.), cut its stock of CDs and its associated retail space in stores by 40 percent. That means only the hottest titles get carried in Walmart stores, which, after iTunes, is the second-largest music retailer in the country.

2. Concert Revenues Don’t Do Enough to Help

According to Boluk, the U.S. concert industry has tripled since 1999, largely due to performers earning an average of 35 percent more on per-ticket prices (adjusted for inflation). But the overwhelming majority of that live music revenue growth, 83 percent, has gone to artists not in the top 100 tour earners.

In 2000, the top 100 touring artists took home 90 percent of all concert revenue in the U.S. Now, that number is down to just 44 percent.

Taken together with rapidly declining recorded music sales, the “disappointing” concert revenue numbers are a serious blow to the wallets of most popular mainstream artists.

The upside is that indie musicians are making more money than ever on rigorous touring schedules, and, according to Boluk, are slowly cannibalizing what little is left of recorded music sales.

3. Music is Less ‘Rare’ Than It’s Ever Been

The shift in music distribution from physical to digital has made music more readily available than at any time in history.

Hop over to YouTube or SoundCloud and there are literally millions of hours of unheard music stashed online, albeit with greatly varying degrees of quality.

The point is, when major labels controlled every aspect of making a record, including recording, distribution, marketing and so on, they also controlled the level of output in the music industry.

With the proliferation of user-uploaded content sites like YouTube (not to mention streaming services like Spotify), the artificial “scarcity” of good music has been exposed. Spotify boasts a collection of 30 million songs in its library, available for anytime-anywhere consumption. And, according to Boluk, the average Spotify user streams 1,300 tracks per month. With a library and a listening habit that large, the “value” of each track necessarily goes down. While musicians like to think their albums are “valuable” (and they are, in the sentimental sense of the term), the saturation of the market has proven the exact opposite to be true.

The move was a sharp rebuke to Spotify over the seemingly skimpy royalty payments the company makes to artists for streams of their music; according to Boluk, Spotify pays artists anywhere between $0.006 and $0.0084, just fractions of a penny, per stream.

And it’s not just Spotify; personalized radio service Pandora has also come under fire for the royalties it pays out to artists per stream.

Of course, this results in songs streamed tens of millions of times generating just a few thousand dollars for their artists. Once royalties to songwriters and publishers are factored in, that number drops even lower.

The economic performance of Spotify is also far from rock-solid. While the company boasts of having 75 million active users, 76 percent of those users accessed the service for free in 2014, contributing only nine percent of the company’s total revenue. According toBillboard, Spotify’s operating losses have doubled since 2013, even while revenue grew 45 percent to $1.22 billion.

Another potentially frustrating aspect of streaming services lies in the way the companies set the value, and the subsequent payout, for each track. Boluk demonstrated the complex system with an example using rapper Drake:

If Spotify users stream more music in August than July, but the same amount of Drake, Drake would see a smaller cheque for the same play count. This could even happen despite an increase in Spotify’s Monthly Revenue

If Spotify’s Monthly Revenue is flat, but Drake’s stream count grows faster than total track volume, he could be paid less per stream but generate more revenue

If revenues increase, Drake could see greater royalties even if stream counts drop

This confusing payout structure is made more frustrating by the changing way in which artists get paid. While artists with big, mainstream physical releases usually collect a majority of their revenue just a few months after the album goes on sale, streaming revenues come every month and, in many cases, in significantly smaller amounts. Additionally, artists and their management teams may not know if an album is a hit for a significantly longer period of time.

5. Record Labels Continue to Stiff Artists

Music distribution channels can only take so much of the blame for the industry’s current dysfunction. According to Boluk, contracts between record labels and their artists have changed little in the last decade despite the major overhaul the industry has gone through as a whole.

To illustrate the point, Boluk pointed to an eye-opening statistic from a recent Ernst & Young report: record labels took home 73 cents out of every dollar paid out by Spotify and competitor Deezer, while songwriters got 16 cents and artists got 11.

With the importance of record labels diminishing as barriers of entry into the industry are lowered, this hardly seems fair.

As Boluk himself put it, at the conclusion of the report: “Most importantly, however, artists must recognize that without new label agreements, their tide will never turn.”

For more on the state of the music business and what the industry can do to survive, check out the rest of Boluk’s REDEF report here.